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Setter Capital Volume Report
Secondary Market 2014
Setter Capital Volume Report
Highlights
The Setter Capital Volume Report analyzes global secondary
market activity in 2014 and covers the following topics:
 Total Volume of Secondary Deals
 Secondary Volume 2014 vs. 2013
 Breakdown of Volume between Funds and Directs
 Breakdown of Volume by Type of Assets Purchased
 Breakdown of Volume by Geography of Assets Purchased
 Profile of Buyers
 Number of Deals and Average Deal Size
 Buyers’ Scope of Interest
 Profile of Sellers
 Percentage of Intermediated Deals
 Predicted Secondary Deal Volume for 2015
 Changes in the Level of Competition
 Changes in Debt Levels
 Expected Multiples
The Survey
As the secondary market continues to grow and evolve, we seek to take a comprehensive and
methodical approach to quantifying the market and identifying trends. Using a survey approach, we
asked principals directly the same questions that buyers, sellers, agents and secondary fund LPs often
ask us. How much was completed in 2014? How much was completed in LBO, venture, real estate,
infrastructure and hedge fund secondaries? What are the expected returns and debt levels?
This report summarizes the results of our survey of the most active buyers in the secondary market for
alternative investment funds conducted early January 2015. Volume is defined as total exposure (NAV +
unfunded in USD) purchased by the respondents and participants included only deals where a binding
agreement (e.g. P&S) was entered into during 2014.
We were pleased by the high response rate – of the 115 most active and regular buyers in the secondary
market, 84 agreed to share their confidential results (see partial list of participants). Given the high
response rate and the fact that nine of the ten largest buyers participated, the respondents to our
survey represented 84% of the transaction volume, making it the most reliable and detailed study of the
industry’s activities.
Being mindful of response bias, we compared the list of respondents to those who had declined to
respond, and did not find any meaningful or obvious differences in the known and observed levels of
activity between the two groups. We then estimated and charted the total volume, number of
transactions, and other reported figures herein by prorating the survey results based on the proportion
of small, medium and large buyers that participated.
We hope you find the results interesting and useful. We welcome any questions and would be happy to
provide further insights into the results.
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2014 in Review
2014 marked the busiest year for the secondary market to date with an estimated $49.3 billion in
completed transactions. Year over year, volume increased 37% driven by new and incumbent buyers
who optimistically and aggressively put money to work and the large number of sophisticated LPs who
executed opportunistic sales.
The breadth and number of buyers continued to increase with total volume and activity of small and
medium buyers becoming more significant. Large buyers, defined as those who deployed more than $1
billion, accounted for 59.8% of the market’s total volume in 2014, while mid-sized buyers accounted for
roughly 34.9% of total volume and small buyers represented roughly 5.3%. Also driving the expansion of
the secondary market was the number of buyers expanding their scope of interest into areas in which
they were previously inactive. Approximately 31% of buyers broadened their secondary focus in 2014 to
include buying other alternative investment types (e.g. infrastructure, real estate, portfolios of direct,
etc.).
There were a total of 1270 transactions in 2014, with an average size of approximately $37.7 million.
Although the number of transactions was roughly the same as in 2013, the average deal size increased
34.6% year over year, reflecting the fact that more multi-hundred million / billion+ dollar transactions
were completed in 2014.
The marked increase in large deals, the dominance of secondary funds (78.6% of total volume) and the
increased market share of large buyers, all demonstrate that 2014 was a banner year for the large
entrenched secondary players. Transaction volume completed by large buyers was $29.5 billion, a 54.6%
increase in volume year over year.
The ranks of opportunistic sellers continued to grow given investors’ increasing familiarity and comfort
with secondary sales along with the disappearance of the stigma associated with selling. Pensions
(28.4%) and banks (24.8%) were the most active sellers in 2014, and most buyers expect the trend to
continue in 2015 with pensions increasing in proportion.
Approximately 56.9% ($28.1 billion) of total secondary volume involved an intermediary in 2014, either
on the buy or sell-side as compared to an estimated $20.5 billion in 2013. We expect the level of
intermediation to continue to rise in response to the entrance of new agents and as sellers struggle to
stay on top of the ever growing buyer universe.
In 2015, buyers expect this heightened activity to continue, leading to another record year for the
secondary market, with volume across all asset classes for the full year of 2015 estimated to be roughly
$56.5 billion - a 14.5% increase over 2014. This increase is supported by an estimated 38.1% of buyers
planning to broaden their secondary focus to include other alternative asset classes (e.g. infrastructure,
real estate, portfolios of directs, etc.).
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Total Volume
Total secondary market volume for 2014 was $49.3 billion. This is the volume estimate of the 115
secondary buyers with dedicated secondary efforts and includes 60 secondary funds, 35 funds of funds,
10 hedge funds, 7 investment consultants, 2 pensions and 1 insurance company. We believe this
estimate is reliable as the 84 survey respondents alone reported $41.5 billion in volume in their survey
responses. The figure is also conservative, as it does not include the activity of over 1000 opportunistic
and non-traditional buyers, whose combined activity may be significant. For instance, the activities of
all sovereign funds (including ADIA, ADIC, GIC, Temasek, etc.) were excluded entirely, even though some
have recently built teams dedicated to secondary purchases.
Volume in $ MM
Type of Assets Purchased
Private Equity (Directs1 & Funds): $37.9 billion
(35.9% increase YoY)
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Real Estate Funds: $6.8 billion
(32.5% increase YoY)
Hedge Funds: $2.5 billion
Infrastructure Funds: $1.9 billion
(177.7% increase YoY)
Agriculture/Timber Funds: $0.2 Billion
(7.8% decrease YoY)
2014 Volume Compares to 2013
This year’s volume represents a 37.1% increase
over 2013 volume which was $36 billion.
5%
Higher
28%
Similar
Lower
67%
1
Consistent with this figure, 67.3% of
respondents said 2014 volume was
significantly higher than 2013, 28.1% felt it was
similar and only 4.6% felt it was significantly
lower.
Private Equity secondary volume increased
from $27.9 billion to $37.9 billion, a 35.9%
increase in 2014.
Real estate volume
increased from $5.1 billion to 6.8 billion, a
32.5% increase in 2014.
Directs include fund recapitalizations and restructurings, fund liquidations, and purchase of single minority stakes and co-investments.
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Assets Purchased
Funds vs. Directs
In 2014, $38.3 billion of funds (77.6%) and $11.0
billion of directs (22.4%) were purchased.
22%
Total Funds by
$ Volume
Total Directs
by $ Volume
78%
Secondaries of direct investments increased
significantly from $5.3 billion in 2013 to $11.1
billion in 2014, which represents a 109.4%
increase. This category includes the volume
transacted in GP restructurings and purchases
of single minority stakes and co-investments.
Breakdown of Fund Secondaries
Volume in $MM
30,000
25,000
20,000
15,000
10,000
5,000
0
- Private equity fund purchases totaled $26.8
billion (~70.0% of total fund sales)
- Real estate fund purchases totaled $6.8 billion
(~17.7% of total fund sales)
- Hedge fund purchases totaled $2.5 billion
(~6.7% of total fund sales)
- Infrastructure fund purchases totaled $1.9
billion (~5.1% of total fund sales)
- Agriculture/Timber funds purchases totaled 0.2
billion (~0.5% of total fund sales)
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Types of Funds Purchased
Private Equity Funds Purchased
4%
2%
5%
6%
LBO – $22.2 billion (82.8%)
LBO
Energy – $1.7 billion (6.4%)
VC
Mezz
FoF
Energy
VC – $1.3 billion (5.0%)
Fund of Funds – $1.0 billion (3.6%)
Mezzanine /Credit – $0.6 billion (2.2%)
83%
Real Estate Funds Purchased
27%
38%
Core
Value-Add
Opportunity
Core – $.2.6 billion (38.2%)
Value-Add – $2.4 million (34.9%)
Opportunity – $1.8 million (26.9%)
35%
Hedge Funds Purchased
20%
Main Funds – $0.5 billion (19.8%)
Main Funds
Side Pockets – $2.0 billion (80.2%)
Side Pocket
80%
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Geography of Assets Purchased
25000.00
North American and Western European
focused funds/directs accounted for the vast
majority of assets purchased in 2014:
Volume in $MM
20000.00
15000.00
North America – $23.6 billion
Western Europe - $18.3 billion
10000.00
Asia-Pacific – $4.8 billion
5000.00
0.00
2% 1% 2%
Asia – Pacific
10%
North America
37%
Western
Europe
CEE and Russia
MENA - Africa
48%
In terms of percentage, North American
focused funds and direct investments
accounted for 47.9% of total volume, Western
European assets accounted for 37.1% and AsiaPacific focused funds/directs accounted for
10.0% of sales.
Latin America
Global
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Profile of Buyers
Type of Buyers
Secondary
Funds
1% 3%
Hedge Sec/FoFs
13%
Funds of Funds
4%
Inv. Consultants
Pensions
79%
Secondary funds were the most active buyers in
2014, accounting for 78.6% ($38.8 billion) of
total purchases, while funds of funds accounted
for 12.8% ($6.3 billion), and funds of hedge
funds/hedge fund secondary funds accounted
for 4.4% ($2.2 billion). Please note: over 1000
non-traditional buyers were not included in our
survey and the resulting estimates.
Insurance
Companies
Other
Locations of Buyers2
N.America
Europe
50%
Asia
European buyers transacted the most (~50.3% of
total volume) in 2014, followed by North American
buyers (~49.2%).
Other
49%
2
Location is based on head office location.
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Activity Levels of Small, Medium and Large Buyers
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
Average Number of Transactions by
Size of Buyer
Average Number of Transactions
Volume in $MM
Volume Distribution by Size of Buyer
Buyers Grouped by Their Volume $MM
35
30
25
20
15
10
5
0
Buyers Grouped by Their Volume $MM
Applying the survey respondents’ dollar volume and transaction numbers, while taking into
consideration the proportion of small, medium and large buyers that did not participate, we estimated
the market share of small, medium and large buyers as follows:
50 small buyers (defined as those that deployed less than $100 million in 2014) purchased $2.6 billion,
representing approximately 5.3% of total volume across 259 transactions with an average deal size of
$10.0 million. There was a slight decrease from 2013, where they accounted for 6%.
54 medium sized buyers (defined as those that deployed $100 to $999.9 million in 2014) purchased
$17.3 billion, representing approximately 34.9% of total volume across 738 transactions with an average
deal size of $23.4 million. There was a decrease from 2013, where they accounted for 41%.
11 large buyers (defined as those that deployed $1 billion or more in 2014) purchased $29.5 billion,
representing approximately 59.8% of total volume across 273 transactions with an average deal size of
$108.0 million. There was a meaningful increase from 2013, where large buyers accounted for 53%.
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Number of Deals and Average Deal Size
Respondents completed approximately 1067 secondary deals in 2014, from which we extrapolated an
estimate of 1270 transactions across the entire secondary market for alternative assets, with an average
size of approximately $37.7 million. Although the number of transactions in 2014 was roughly the same
as in 2013, the average deal size increased 34.6%, reflecting the fact that more multi-hundred million /
billion+ dollars deals were completed in 2014.
Average Deal Size by Size of Buyer
160
Average Deal Size $MM
140
120
100
80
60
40
20
0
Buyers Grouped by Their Volume $MM
The significant increase in the average deal size was driven mainly by the marked increase in multihundred million / billion+ dollars deals completed in 2014.
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Buyers’ Scope of Interest
Buyers That Broadened Their Focus in 2014
31%
Broadened
Scope
Did Not Broaden
Scope
Approximately
31.4%
of
participants
broadened their secondary focus in 2014 to
include buying other alternative investment
types (e.g. infrastructure, real estate,
portfolios of directs, etc.). This percentage
represents a 1.4% increase from 2013.
69%
Buyers That Intend to Broaden Their Focus in 2015
Will Broaden
38% Scope
Will Not
Broaden Scope
62%
Approximately 38.1% of the participants plan
to broaden their secondary focus in 2015 to
include buying other alternative investment
types. This percentage represents a 14.1%
increase from buyer’s expectations in 2013
and a continued trend of buyers to diversify.
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Buyer Competition, Debt and Returns
Buyer Competition for Deals in 2014 Compared to 2013
3%
47%
50%
Higher
Similar
Over 50% of respondents felt buyer competition in
2014 was significantly higher than 2013, while 46.7%
felt it was similar.
Lower
Level of Debt Used by Buyers in 2014 Compared to 2013
1%
32%
Higher
Similar
Approximately two thirds believed the level of debt
used by buyers had increased significantly in 2014.
Lower
67%
Expected Multiple for Secondary Deals Completed in 2014
30
25
20
15
According to the respondents, the average expected
gross multiple for secondary deals completed in 2014
will be 1.43x.
10
5
0
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Seller Profiles
Expected Sellers for 2015
Type of Sellers in 2014
11%
Banks
2%
Insurance Companies
25%
4%
1%
6%
Pensions
Sovereign Funds
4%
6%
1%
18%
7%
4%
Family Offices
3%
7%
2%
5%
12%
28%
Endowments /
Charities
Fund of Funds /
Secondary Funds
Hedge Funds / Hedge
Fund of Funds
Other Fund GPs (non
FoF or Sec Funds)
Corporate - Balance
Sheet (non-financial)
16%
38%
Pensions (28.4%) and banks (24.8%) were the most active sellers in 2014. Most buyers expect the trend
to continue in 2015 with pensions taking an increasing proportion.
Geography of Sellers
25000
5%
13%
20000
4%
Asia – Pacific
North America
Western Europe
CEE and Russia
29%
MENA - Africa
Latin America
Volume in $MM
4%
15000
10000
5000
0
45%
In terms of the location of sellers, North America and Western Europe based sellers accounted for the
vast majority of volume in 2014. North America based sellers sold $22.3 billion (45.2%), whereas
Western European based sellers sold $14.2 billion (28.8%). Asia-Pacific based sellers accounted for
13.3% of the total volume.
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Intermediaries
Intermediated Volume Transaction
43%
Total Volume
57% Involving
Intermediary
Total Volume
Not Involving
Intermediary
Approximately 56.9% ($28.1 billion) of total
secondary volume involved an intermediary,
either on the buy or sell-side.
Although
the
percentage
of
deals
intermediated was the same as 2013 , in terms
of volume, agents intermediated $7.6 billion
more in deals, an increase of 37% over 2013.
Indeed, Setter Capital had its most successful
year with $4.7 billion in completed
transactions.
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Projected Volume for Full Year 2015
How 2015 Volume Will Compare to 2014
8%
14%
Similar
Higher
92.7% of respondents felt 2015 volume will be
similar or higher to 2014 volume. This figure is
lower than the prior year (i.e. 99%) suggesting
secondary market volume will not grow as fast
next year.
Lower
78%
Predicted Volume for 2015
35000
Volume in $MM
30000
25000
20000
15000
10000
Respondents predicted total volume for 2015
across all asset classes to be $56.5 billion,
which would represent a 14.5% increase over
the $49.3 billion transacted in 2014. Estimated
2015 volume is $43.9 billion for private equity,
$7.7 billion for real estate, $2.5 billion for
hedge funds, $2.2 billion for infrastructure
funds and $0.2 billion for agriculture/timber
funds.
5000
0
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Select Respondents
17Capital
Neuberger Berman
Abbott Capital Management
Northleaf Capital
Access Capital Advisors
Northern Trust Corporation
Adams Street Partners
North Sky Capital
Adveq
NorthStar Realty
Akina Partners
Newquest Capital Partners
Alpha Associates
Pantheon Ventures
Arcano Group
Partners Group
Auda International
PEI Funds
Axiom Asia
Permal Capital
Canada Pension Plan Investment Board
Pictet Alternative Investments
Capital Dynamics
Portfolio Advisors
Commonfund Capital
Private Advisors
Coller Capital
RCP Advisors
Corbin Capital Partners
Stafford Capital Partners
DAAM UK (Deutsche Bank)
Siguler Guff Advisors
Dorchester Capital Advisors
SL Capital
Lothian Pension Fund
Sobera Capital
Fondinvest
Stepstone
Glenmede Trust
Storebrand
Graphite Capital
TR Capital Group
Greenspring Associates
Tyrus Capital
Hamilton Lane Advisors
Unigestion
HarbourVest Partners
Verdane Capital
Jasper Ridge Partners
Vintage Investment Partners
Mantra
W Capital Group
Mercer
Willowridge Partners
Munich Private Equity Partners
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